HONG KONG—Efforts by Noble Group Ltd. to stem its sliding stock price were frustrated Friday as questions about its accounting practices continued to dog the embattled commodities trader. Shares finished the week with a 3.5% decline, bringing losses to 15% since Michael Dee, a former senior executive at Morgan Stanley and Singapore’s sovereign-wealth fund Temasek Holdings Pte. Ltd., two weeks ago emerged as Noble’s latest critic and helped to spark a renewed decline in the stock. Its shares are down 40% this year.

Questions raised by ratings firm Standard & Poor’s cast a pall over the company Friday, cutting short a startling stock surge on Thursday after Noble appealed for patience from its investors and employees and bought back millions of its own shares. S&P cut its outlook on the company’s debt to “negative” from “stable” while reaffirming its triple-B-minus rating, an investment-grade designation one level above junk territory.“The company’s profitability could be more volatile than we previously expected,” S&P said in the report, released late Thursday.

The company, which generates profits primarily by acting as a middleman in the trading of physical commodities, has been buffeted for months by a slew of critics, including U.S. short seller Muddy Waters LLC, who have accused it of inflating gains on some of the derivative and long-term contracts it holds. Noble has repeatedly denied wrongdoing.

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But its explanations of how it accounts for its stakes in other companies, particularly its 13% holding in miner Yancoal Australia, as well as the way it records sales of inventory, have continued to draw criticism. Mr. Dee this week called on Noble’s chairman, Richard Elman, to resign.

“It is only with truthful and detailed answers to questions posed by the market that Noble can move forward,” Mr. Dee said in comments to The Wall Street Journal. He said he had no position in Noble’s shares.

Mr. Elman in an open letter to shareholders and employees Thursday hit back at critics he said “have nothing to do with Noble and probably do not even know what we do.”

“Our silence has not, in fact, been silence,” Mr. Elman said in the memo. “We have been working vigorously behind the scenes to protect your interests and we are starting to make progress.” A spokesman for Noble Group declined to comment further on Friday.

In a release to the Singapore stock exchange on Friday, the company said it bought back 25 million of its own shares during Thursday’s session—or about 0.4% of total issued shares—for 67 Singapore cents (50 U.S. cents) each, costing it S$16.8 million. The company obtained approval from shareholders to buy back its own shares at its annual general meeting in April.

A total of 168 million Noble shares changed hands on Thursday, according to FactSet, more than four times its 30-day daily average trading volume. Borrowing of Noble shares to bet on further stock declines had climbed to nearly 8% of freely traded shares ahead of Thursday’s climb, suggesting some bearish investors scrambled to buy back shares as the stock surged as much as 11%.

Noble Finds Itself Short of Confidence

Noble Group’s negative ratings outlook is a sign the commodities trader needs to consider its options

ABHEEK BHATTACHARYA

June 12, 2015 6:55 a.m. ET

Confidence is king in commodities trading. A sudden lack of it is what could dethrone Noble Group.

Rating firm Standard & Poor’s lowered the outlook on Noble Group’s credit to “negative” from “stable” on Thursday, one step closer to a dangerous downgrade into “junk” status—which could imperil its lifeline of short-term credit.

Investors could be excused for wondering whether the company’s move to buy back shares and so boost the share price—just hours before S&P’s announcement—was made out of desperation. S&P says it provides companies a draft of its findings hours before they are released.

The buyback only momentarily flushed out short sellers. The shares again fell Friday, bringing their decline for the year so far to 39%.

S&P’s concerns aren’t new. Short seller Muddy Waters and Hong Kong-based GMT Research have assailed Noble for reporting impressive paper profits from changes in the values of its commodity or derivative contracts, while not generating much cash. Net changes in the so-called fair value of these contracts amounted to 81% of shareholder equity as of March.

ENLARGE

For a rating firm to voice these concerns, though, is far more irksome. Most commodities-trading houses need access to cheap financing. Noble uses it to ship coal or oil and hedge cargoes using derivatives. Noble did display a show of strength by refinancing a $2.3 billion revolving-credit facility last month, but that marked a retreat from the initial idea of raising $3 billion, The Wall Street Journal reported in April. A credit-outlook change could spook a future pool of lenders.

Noble would get back in S&P’s good graces by generating more cash and getting the fair-value gains under control. One way these fair-value gains could come down would be for Noble to become more conservative in recognizing them, thus bringing profits in line with cash flows. Yet, considering Noble reported negative operating cash flows in 2014 and again in the March quarter, that might have the effect of damping profits.

Noble could also re-establish its credit outlook by selling off a big asset and generating visible cash. It offloaded a 51% stake in its agricultural arm last year to a consortium led by China state grain trader Cofco for $1.5 billion. A new strategic shareholder would also help, but with China Investment Corp. already selling down its stake, one obvious buyer seems to be going in the wrong direction.

Noble needs to quickly consider its options—or risk an even more calamitous loss of confidence.

Noble Group, the Asian commodities trader that is under fire over its accounting practices, has been put on notice by credit rating agency Standard & Poors that it risks being downgraded to junk status.

S&P revised its outlook on Noble from stable to negative just hours after Noble’s founder and chairman, British-born businessman Richard Elman, appealed to investors to have “confidence” in the company’s management.

Noble’s Singapore-listed stock rose 9.3 per cent to close at S$0.71 on Thursday following Mr Elman’s statement. Earlier on Thursday, the Hong Kong-based company’s shares hit their lowest level since 2009.

Noble’s accounting policies have been criticised by a mysterious research firm called Iceberg Research since February, and by Muddy Waters, the US short seller, in April.

S&P maintained its BBB-minus rating on Noble’s debt – one notch above junk – but revised its outlook because it judged the company’s trading risk position “to have weakened”.

How and when Noble books profits from long-term commodity contracts has been at the centre of questions by Iceberg.

The research firm claims that Noble’s profits are being reported too early, and could be smaller than at first glance. In a 28-page report in February, Iceberg sought to highlight a divergence between Noble’s net profit and operating cash flows, which it alleged were the result of the company increasing the fair value of unrealised commodity contracts.

Yusuf Alireza, Noble’s chief executive, said after the S&P outlook revision that he was “delighted” that the agency had affirmed Noble’s investment grade status, which is important for commodity traders that rely on short-term funds.

“We have a very strong track record of securing funding,” he said.

In recent weeks, Fitch and Moody’s have reaffirmed their investment grade ratings for Noble.

Meanwhile, Mr Elman, who is Noble’s largest shareholder, on Thursday hit back at claims that the company had been slow to provide a full response to the allegations by Iceberg and Muddy Waters.

“Our silence has not, in fact, been silence,” Mr Elman said in a letter to shareholders. “We have been working vigorously behind the scenes to protect your interests and we are starting to make progress . . . Have a little confidence and patience in us.”

Noble has previously defended its accounting, while giving some new disclosures on gains and losses on its long-term commodity contracts.

Michael Dee, former head of Morgan Stanley’s operations in south-east Asia and a critic of Noble’s management, repeated his call for Mr Elman to quit and said Mr Alireza might also need to resign unless he could more fully answer questions about Noble.

In remarks directed at Mr Elman, Mr Dee said: “You have had the market’s patience and confidence and you have abused it. Confidence can be rebuilt, but not by you.”

SHARES in commodities firm Noble Group may have enjoyed some respite from their recent weakness when they bounced S$0.06 from a six-year low to close at S$0.705 on Thursday after its chairman Richard Elman sent a letter to shareholders and staff to reassure them that management is working hard behind the scenes. But unless the company takes radical steps to win over the market’s confidence, there is every chance that weakness may quickly resume.

Noble’s shares have been falling for months and almost all sessions over that time; they have not strayed far from the top of the daily lists of actively traded stocks, so the slide has come in high volume.

This cannot be a good sign, especially when the weakness has been accompanied by a deafening silence from the company in the face of mounting public scrutiny of its accounts.

Noble’s problems started when a self-proclaimed corporate whistle-blower named Iceberg Research on Feb 15 released a 17-page report attacking Noble’s accounting practices, in particular its classification of Australian-listed Yancoal

as an associate instead of an investment.

The day before the report was issued, Noble’s shares closed at S$1.205, which means that even with Thursday’s rebound, they have now plunged about 42 per cent in four months.

Both have argued along similar lines as Iceberg, though with different intentions – in Muddy Waters’ case the objective is clearly to make a profit from having shorted the stock, whilst Mr Dee operates from a standpoint of governance and transparency.

His latest salvo came in the form of a May 29 memo to Noble’s employees telling them that the collapse in their company’s shares should be a signal that “there is something very wrong” with their company and that time is running out to fix it.

Mr Elman’s letter on Thursday was likely written in response to Mr Dee’s memo though this was not explicitly stated; meanwhile, at least one house has turned negative on the stock – OCBC Investment Research on Thursday said it has reduced its valuation from 13.5 to 8 times FY15 forecast earnings, which reduces its fair value for Noble from S$1.05 to S$0.61.

What might be Noble’s best course of action?

Privatisation springs to mind as a remote possibility – after all, Noble was originally listed in Hong Kong and delisted there in 1996 in favour of Singapore when its chairman Richard Elman, frustrated by Hong Kong’s inability to recognise the value of his business, led a consortium of investors to buy out shareholders at HK$2.05 per share (then S$0.37) before listing in Singapore in 1997 at US$0.88 per share.

However, this option would surely prove most unpalatable to the majority of shareholders, particularly institutions who have been buying – albeit in small amounts and as a show of support – on the way down over the past few months at higher prices.

Concerns

A much better way forward would be for the company to directly address areas of the market’s greatest concern, issues which Iceberg, Muddy Waters and Mr Dee have raised and which appear to have not been satisfactorily answered.

For instance, Yancoal’s value, which on Noble’s books is 30 times its market value. Even though Noble has dismissed the market price as not being reliable because Yancoal’s shares are not actively traded, it has not yet disclosed the formula it employs in its valuation.

This must be done as soon as possible; after all even if the market does sometimes mis-price illiquid stocks, surely the mis-pricing cannot persist for months and years, and surely the valuation gap cannot be that large?

Although there are several other accounting-related questions, perhaps the most important point to note is that all throughout the past four months Noble has brushed off the issues raised by its critics as having no basis and this position prevails up to now – in his Thursday letter, Mr Elman said “there have been a lot of rumours, gossip, inaccurate statements and commentary from people who have nothing to do with Noble and probably do not even know what we do”.

On the contrary, the share price weakness of the past four months suggests the market believes Noble’s critics not only know the company’s business, but also seem to have a firm handle on what might go wrong.

Making the appropriate disclosures would be an important first step in winning back the market’s confidence, especially since months of denial have not worked.

Guest Speaker Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a single family office, and Founder and Chairman of the BRKets investor groupMarch 17th, 2015

Hemant, a big thank you for educating and inspiring the next generation of leaders. You are a rare positive role model in the Asian capital markets and you showed the students that it is possible to create value because one has the right values and mindset like Buffett and Munger! :)